Compensation 101

Today’s lesson plan: Compensation 101 - How To Use Market Data To Support Your Compensation Philosophy

Compensation 101

Market PricingMarket Pricing

Data Analysis

Job Matching

Compensation Philosophy

= Putting all of the pieces together for the final product

= Taking accurate measurements based on the foundation created

= Selecting appropriate resources that are easily recognizable; limit custom design

= Foundation for defining your market and competitive position

Foundation for defining your market and competitive position.

Compensation Philosophy

Compensation philosophy:We use an external market-referenced approach to attracting and retaining top candidates in Southeast Michigan. We pursue all avenues to get what we want; no company is safe from our recruiting efforts. We strive to lead the market and pay more than the going rate to our employees based on demonstrated skill and performance– our money grows on trees.

Foundation for defining your market and competitive position.

Compensation Philosophy

So what do we know about this company in terms of the market-referenced approach?

•What is the hiring and retention strategy?•What is the labor market?•What is the market position?

Selecting appropriate resources that are easily recognizable

Using our job descriptions that are reviewed and updated every year…

Select benchmark jobs from the surveys

Do not rely on job titles or levels

Job Matching

Selecting appropriate resources that are easily recognizable

There are few jobs in the market that will match your jobs 100% in terms of job content

Therefore one rule of thumb is to consider the match to be appropriate if 70% or more of the job content is similar

Job Matching

Selecting appropriate resources that are easily recognizable

So what do you do about the job that doesn’t meet the 70% criteria?

Consider different approaches to tackle the “person-specific” jobs in your organization

Job Matching

Selecting appropriate resources that are easily recognizable; limit custom design

Let’s say 60% of a job is “chief bottle washer” and 40% of a job is “executive chef”. What can you do?• Pay market rate of similar benchmark job• Pay the market rate of the bottle washer• Pay the “bottle washer” rate + a premium %• Combine the market data 60%/40%• Pay the highest market rate of the two jobs

Job Matching

Taking accurate measurements based on the foundation created

Data Analysis

What did we say in our compensation philosophy about:

Our labor market?

Our target competitive pay?

Our market position?

Taking accurate measurements based on the foundation created

Data Analysis

•Target - Pay more than the going rate

The Median or 50th percentile is generally considered to be the going rate of pay for the position

•Paying more than the going rate might could mean using the 75th percentile for competitive positioning

Taking accurate measurements based on the foundation created

Data Analysis

•Market Position - Lead the market

•All survey data must be aged

•Salary surveys will typically publish projected structure and budget increases

•Select your change rate and a future common date to age your data

Taking accurate measurements based on the foundation created

Data Analysis

•Reacting to trends

•Data jumping up or down?

•Consider removing data from your study that appears inconsistent based on your research

Putting all of the pieces together for the final product

Market PricingMarket Pricing What do you do with multiple survey sources or data points?

•Take the average of the data points for each job

•Weight surveys/data differently based on your compensation strategy

•Weight surveys/data differently based on the quality of the survey/data

Putting all of the pieces together for the final product

Market PricingMarket Pricing What do you do with the market data points?

•Could use the data points (10th %, 25th %, 50th %, 75th %, 90th %) to establish market rates for each job or to develop/update salary ranges

Putting all of the pieces together for the final product

Market PricingMarket Pricing •Pay rates are set – they are aligned with the compensation philosophy……so now what?

•Compare incumbent pay to the market data and analyze need to adjust pay

Putting all of the pieces together for the final product

Market PricingMarket Pricing •Look at incumbent pay or job family pay compared to market rate.

•Market index – divide the base salary by the market rate•Compa-ratio – divide the base salary by the midpoint

•1.00 or greater – at or above market rate/midpoint•Less than 1.00 – below market rate/midpoint

Putting all of the pieces together for the final product

Market PricingMarket Pricing Things to consider if it appears you are over/underpaying:

•Match to market

•Skill/performance

•Accuracy of survey data

•Labor market conditions

•Plan to correct issues over time

Putting all of the pieces together for the final product

Market PricingMarket Pricing Educating staff:

•Communicate, communicate, communicate

•Transparency

•Support the “right” decisions

Compensation 101

Market PricingMarket Pricing

Data Analysis

Job Matching

Compensation Philosophy

Final Exam